October 2015 Understanding the European Consequences of a Modern Greek Odyssey

Heather A. Conley and James Mina

Over the past 18 months, has been led by Greece’s third bailout program and a set of two very different prime ministers and policies that run contrary to its stated policy governments: those of the center-right New platform. Yet while a large portion of the Greek Democracy leader, (from June population supports ’s anti- 20, 2012, until January 26, 2015), and the far-left stance, the country remains largely pro- Syriza leader, (who was elected European and pro-euro. As Greece’s on January 26 and reelected on September 20). membership in the common currency has These leaders have had vastly different become deeply intertwined with its ability to domestic, European, and foreign policies, enact reforms, the stage is now set for a period particularly with regard to their responses to of immense political uncertainty as the country’s protracted economic crisis and must balance both of these competing policy interaction with Greece’s creditors. priorities.

Elections matter. Following Prime Minister Greece’s policy turbulence is not merely a Tsipras’s election, Greece went from posting domestic problem, however; its impact positive economic growth in December 2014 reverberated throughout the and and being poised to exit its bailout program, to challenged the very foundations of the fighting an impassioned battle against its European project as leaders and publics alike creditors in pursuit of more lenient terms responded to these developments. While following Syriza’s electoral victory on January previously European governments have 25, 2015, to imposing capital controls and consistently stated their firm commitment to accepting a third and most restrictive financial preserving the integrity of the Eurozone at all assistance package on July 13. After agreeing to costs, for the first time, Europe’s largest creditor such a substantial policy change, the Syriza country, , indicated a willingness to party splintered, forcing Prime Minster Tsipras give Greece “a time out” from the currency to hold snap elections on September 20. union over the unwillingness of the Tsipras government to cooperate and implement the Despite this reverse performance, on terms of its bailout agreement in full. With this September 20 the Greek people reelected the taboo broken, divergent economic philosophies exact same government, although its majority is and interests between northern and southern slim. The second Syriza government is now European nations continue to hinder the charged with implementing the terms of creation of an “ever-closer union.”

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The past 18 months represent a consequential IMF loan on June 30 of this year. In hindsight, period for the Greek people and the European Greece’s creditors neither understood the Union, which must be better understood. These devastating consequences that their measures policy shifts were dramatic and sudden, and (based on a grossly miscalculated austerity they correspond with three distinct phases in multiplier) would have for the Greek economy governance during which Greece not only and society; nor did they appreciate how experienced radical changes in its economic resistant the Greek people would be to a and social policies but also its diplomatic and fundamental change in how they governed political environment as well. The following themselves. policy brief draws upon real-time insights gleaned from a CSIS discussion series that Since 2010, Greece has received a total of €240 focused on the Greek EU Council presidency, billion from its creditors as represented by the which brought a series of senior Greek officials International Monetary Fund (IMF), the from both the Samaras and Tsipras (ECB), and the governments to Washington to illuminate in exchange for Greece’s decisions during each of its three sweeping reductions in public-sector policy phases, reflect on the marked shift in its expenditure and a massive sale of state assets economic prospects, and consider the dynamics flagged at €50 billion. and factors that have shaped this critical chapter in Greece’s—and Europe’s—recent Nonetheless, under the of history. Prime Minister Antonis Samaras (which included the center-right party Phase One: “Green Shoots” of and the center-left Pan-Hellenic Socialist Economic Growth (December 2013– Movement, or PASOK) from June 20, 2012, to January 26, 2015, Greece made significant December 2014) progress toward fulfilling its structural reform agenda. By 2014, Greece had moved up 28 Greece is a country of firsts. Of course, Greece is places in the World Trade Organization’s recognized as the birthplace of democracy but “Doing Business” rankings since 2012 and the it is more readily known as the first country to Organization for Economic Cooperation and succumb to Europe’s Sovereign Debt Crisis in Development (OECD) placed Greece among its 2008 and the first to accept a European bailout top members in adopting pro-growth policies. package (and a second and third one), which Greece also exceeded its budget expectations mandated deep spending cuts and a rigorous for 2013 ending with a current account and structural reform agenda. While other primary surplus for the year. By the second Eurozone countries—, Ireland, and quarter of 2014, Greece had achieved GDP —were forced to accept painful bailout growth (year-on-year) of 0.5 percent and by the and bank packages, these countries have third quarter had achieved its nadir of 1.4 formally ended their bailout programs. Yet percent GDP growth.1 It was expected that the Greece’s bailout program—by far the largest Greek economy would grow by 0.6 percent and most rigorous—was also the first to end overall in 2014. Greece also began to enjoy a unceremoniously as Greece also became the first developed country to ever default on an

1 Hellenic Statistical Authority, “Quarterly National portal/page/portal/ESYE/BUCKET/A0704/PressReleases/A0 Accounts: 3rd Quarter 2014 (Provisional Data),” Press 704_SEL84_DT_QQ_03_2014_01_P_EN.pdf (seasonally release, November 28, 2014, http://www.statistics.gr/ adjusted figures).

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laws. Slowly, unemployment in Greece Greek GDP Growth (% yoy) - Phase I decreased from a high of 27.5 percent in 6 December 2013 to 25.9 percent in January 4 2015.2 The Samaras government took initial 2 steps to scale back its bloated public sector 0 (which accounted for 53.6 percent of GDP in 3 -2 2009 ) by reducing the number of public -4 employees (Athens cut as many as 161,000 state- funded positions between 2010 and 2014),4 -6 although this encountered strong resistance. -8 2012 2013 2014 2015* 2016* To help soften its austerity program and Phase I reorient its flagging economy, Athens sought to *Data for 2015 and 2016 is forecast. capitalize on its unique geographic position by reinventing itself as a regional energy hub. During this period, Greece enhanced its Greek Parliament Seat Distribution - resource exploration efforts and launched a call Phase I for tenders in the onshore blocks in the west of Syriza Center-Left New Democracy Far-Right the country. Already, Greece is home to the only Other liquefied natural gas (LNG) terminal in the Balkans and its close proximity to the large natural gas reserves off the coast of Cyprus and presents it with the unique opportunity to Jun-12 71 33 129 38 29 serve as a point of entry for European markets. Toward this end, the Samaras government enhanced its cooperation with regional neighbors (in particular Cyprus, Israel, and Egypt) to begin considering possible pipeline *Data for 2015 and 2016 is forecast. connections. The East Med pipeline, for example, would link Israeli and Cypriot gas to primary budget surplus and regained some via the Greek island of . While plans access to international capital markets again. for this project remain notional, a contract was Since Greece was able to internally fund its awarded to the Trans-Adriatic Pipeline project, needs through its primary surplus, it was which will begin pumping Caspian Sea gas believed in 2014 that Athens would be able to through Greece by 2020. Athens also worked exit its bailout program in 2015 without an with its Bulgarian partners to finalize plans for emergency line of credit. the Greece- gas interconnector, with the goal of unifying Europe’s energy markets in Greece also began to implement labor and response to geopolitical tensions with pension reforms, as well as market over its involvement in . liberalization measures and revised residency

2 Eurostat, “Unemployment Rates by Sex and Age Publishing, 2011), 65, http://www.oecd.org/gov/ Groups—monthly average, %,” October 15, 2015, governmentataglance2011.htm. http://ec.europa.eu/eurostat/product?code=une_rt_m&lan 4 International Monetary Fund, Greece, IMF Country guage=en&mode=view. Report No. 14/151, June 2014, http://www.mnec.gr/ 3 Organization for Economic Cooperation and sites/default/files/cr14151.pdf. Development, Government at a Glance 2011 (Paris: OECD

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Greece’s collaborative diplomacy extended well concessions. It was hoped that the privatization beyond the energy sector. During this period, of Greece’s infrastructure would serve as a Athens also encouraged the fledgling catalyst for future investment in other areas of negotiations over the reunification of Cyprus, the economy. The private sector began to show and hosted talks with representatives of some employment expansion, but senior Greek Turkish Cypriot communities on behalf of officials noted that the inflow of funds from the Nicosia on February 27. Greece also hosted an sale of public assets would not benefit the Greek EU-Western Balkans Ministerial Conference on economy nearly as much as the incremental May 8, 2014, as a follow-up to the 2003 investments made by private owners to Thessaloniki Summit to demonstrate Europe’s upgrade existing assets. Greek officials also commitment to the region and consider complained that complex EU regulations opportunities to enhance cooperation, hindered Greece’s privatization program, yet investment, and development aid.5 Within the there was also difficulty in determining fair and EU, despite the unpopularity of austerity (and transparent prices and ownership right its German sponsors) at home, the Samaras agreements with prospective buyers in Greece. government sought to work constructively with While the first Greek bailout package its European creditors and maintained a cordial envisioned that privatization assets would relationship with . Greece’s reform garner €50 billion in its first three years of efforts were lauded by Chancellor Angela implementation, in reality the program only Merkel, who as recently as September 2014 produced €1.3 billion in revenues as these deals praised the progress achieved by Samaras and stalled due to such red tape.7 shared her empathy for the suffering of the Greek people, noting “the first delicate green Although Greece’s privatization plan failed to shoots of success are visible.”6 significantly advance during the Samaras government, Greece did experience an Despite these positive developments, the encouraging inflow of foreign direct investment Samaras government was unable to (FDI) in 2013, which by the second quarter of successfully implement all of the bailout 2014 had reached a promising 1.56 percent of reforms and address many of Greece’s inherent GDP. Yet, this seemed to be a temporary economic problems. For instance, despite development as the following quarter FDI fell to committing to an ambitious privatization 0.28 percent of GDP.8 One explanation for the program under its bailout plan, Greece has positive trend could be the increase of Greek struggled to sell many of its national assets. domestic startup businesses and the return of Athens slowly began to implement its large, multinational companies such as Coca privatization program beginning with the Cola, which opened its Pan-European Social container portion of the Port of Piraeus and had Media Center in Greece. In 2014, several high- planned to include key assets such as state- profile research and development investments owned national utilities and airport operation were made from companies like Samsung,

5 Hellenic Republic Ministry of Foreign Affairs, “EU- http://www.dw.com/en/merkel-and-samaras-laud- Western Balkans Ministerial Conference: Presidency greeces-progress-on-reforms/a-17948976. Statement,” Announcements, May 8, 2014, 7 International Monetary Fund, Greece: Preliminary Draft http://www.mfa.gr/en/current-affairs/news- Debt Sustainability Analysis, IMF Country Report No. announcements/eu-western-balkans-ministerial- 15/165, June 26, 2015, 4, https://www.imf.org/external/ conference-thessaloniki-may-2014.html. pubs/ft/scr/2015/cr15165.pdf. 6 Jasper Sky, “Merkel and Samaras laud Greece’s progress 8 CEIC, “Greece Foreign Direct Investment FDI Data,” on reforms,” Deutsche Welle, September 23, 2014, Global Database, http://www.ceicdata.com/en/ statistics/Greece/Foreign-Direct-Investment-FDI.

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Proctor & Gamble, and Nokia-Siemens for was perceived as having shielded Greece’s research facilities in Greece. The Greek oligarchs from bearing their portion of the government had committed to doubling its burden. Such perceptions led to the defeat of budget allocation to research and development New Democracy and decimation of the PASOK initiatives (from 0.67 percent of GDP in 2011 to in snap elections on January 25, catapulting the 1.21 percent by 2020),9 with the goal of left-wing anti-establishment and anti-austerity reorienting the Greek economy toward greater Syriza government into power. high-tech, research-based industries. Greece’s interest rate spreads returned to pre-crisis This power shift signaled the end of the “first levels during this period, indicating that Greece phase” in Greek economic and foreign policy had taken sufficient measures to restore over the past two years. Despite the investor confidence. considerable economic and reform progress made under the Samaras government, these Perhaps the greatest failure of the Samaras improvements were only temporary and government was its inability to tackle tax conditional due to the administration’s inability evasion and corruption, a problem that has to initiate a deep, structural transformation of plagued Greek public finances for decades. the Greek economy and to tackle Greece’s Despite its high levels of social spending (in sovereign debt burden. When Prime Minister 2013 Athens spent 24.3 percent of its GDP on Samaras left office in January, Greece’s debt-to- social services alone),10 Greece only collects tax GDP ratio stood at 177 percent12 and many of his receipts equal to 37 percent of GDP11 to finance reforms and spending cuts were swiftly this expenditure, leaving Athens overly reliant repealed with ease—and enthusiasm. on borrowing. Under the terms of the bailout, Greece was required to improve its tax- Phase Two: Greece’s Sharp Left Turn collection efforts but after several years in (January 2015–July 2015) office, the Samaras government failed to make measurable progress on this front. In In retrospect, December 9, 2014, marked the particular, the government struggled to beginning of a significant downward trend in improve tax receipts from Greece’s wealthiest Greece’s political culture and economic well- individuals as well as self-employed being. While the daily gyrations of stock entrepreneurs. As a consequence, the lower and markets rarely signal the future, on December 9 middle classes of Greek society were forced to the Greek stock market fell 12.78 percent—its shoulder the burden of Greece’s heavy largest drop since 1987—on the news that the austerity, paying more in taxes while earning Greek government had failed to secure the less. The inability of the political establishment parliamentary majority necessary to elect a to tackle tax evasion among Greece’s upper new president, and that a series of doomed class contributed to widespread resentment votes would be held to break the stalemate.13 against the New Democracy government, which While seemingly insignificant, this failure

9 Greek Ministry of Finance, Greek National Reforms 12 Ian Talley, “Greece’s Debt. The Numbers,” Wall Street Programme 2014, April 2014, http://ec.europa.eu/ Journal, July 3, 2015, http://blogs.wsj.com/briefly/ europe2020/pdf/csr2014/nrp2014_greece_en.pdf. 2015/07/03/greeces-debt-the-numbers/. 10 OECD.Stat, “Social Expenditure,” https://stats.oecd.org/ 13 Mike Bird, “Greece Crashes,” Business Insider, Index.aspx?DataSetCode=SOCX_AGG. December 9, 2014, http://www.businessinsider.com/ snap- 11 Eurostat, “Total tax revenue by country, 1995–2014,” election-fears-are-tanking-the-greek-stock-market-2014- June 21, 2015, http://ec.europa.eu/eurostat/statistics- 12/. explained/index.php/File:Total_tax_revenue_by_country,_ 1995-2014_%28%25_of_GDP%29.png.

6 | HEATHER A. CONLEY AND JAMES MINA demonstrated the extent of New Democracy’s a visit to the memorial of Greek victims of the demise and sent a clear signal that the Nazi regime and met with the ambassadors of government—which had lent a steady hand Russia and China within the first 48 hours of his amidst great domestic uncertainty—was on the tenure.16 Syriza officials also asserted that the verge of collapsing. Sure enough, 20 days later terms of Greece’s past bailouts were all forms of on December 29 and after three rounds of punishment executed by a dominant Germany unsuccessful voting, Prime Minister Samaras’s that was unwilling to consider debt relief candidate failed to secure the necessary 180 despite its own economic absolution in 1953. votes and the Greek parliament was dissolved, They equated the memorandum to Germany’s paving the way for new elections on January 25, oppressive punishment in the post–World War 2015.14 These elections saw the victory of the I Versailles Treaty and continually underscored left-wing, anti-austerity Syriza party and its the fact that Greece’s crisis was Europe’s crisis. leader, Alexis Tsipras, with 36 percent of the They also blamed austerity and the country’s vote. With this victory, Syriza won 149 seats in fluctuating and uneven tax laws for an increase the parliament—just short of an absolute in kleptocracy and corruption, which ultimately majority—and ruled in coalition with the far- placed control of Greece’s banks and major right party (13 seats), economic sectors in the hands of Greece’s 20 amounting to a total of 162 seats in the wealthiest families. parliament.15 Yet despite this rhetorical vitriol, there were a Tsipras campaigned on a contradictory few admirable arguments embedded in Syriza’s platform that advocated for simultaneously manifesto, foremost among them the urgent ending Greece’s EU-mandated austerity while need to enforce growth-friendly and socially remaining within the Eurozone, a sentiment conscious economic policies, tackle corruption that appealed to dominant populist elements in and social inequality, redistribute the burden of Greek society but held little practical feasibility. austerity more fairly, and ease the widespread Nonetheless, the new Syriza government suffering of the impoverished Greek nation. immediately embarked upon hardball tactics and inflammatory delivery mechanisms (in the Over the course of the next several months the form of Finance Minister Varoufakis) with its Syriza government fulfilled many of its European creditors to relieve Greece’s debt campaign promises and succeeded in reversing burden. Fully airing Greece’s current (and many of the reforms required by its creditors, historic) grievances, the government was flagrantly violating its bailout agreement. unapologetic about its economic policy Syriza announced that it would rehire nearly differences with Germany and other northern 4,000 laid-off government workers on European countries, placing the blame for humanitarian grounds17 and also that it would Greece’s condition squarely on their shoulders. halt Greece’s privatization program, stating In a symbolic gesture of defiance against Berlin, unequivocally that “strategic state assets won’t Prime Minister Tsipras’s first official event was

14 Kerin Hope, “Fears for fresh Greek crisis after poll 16 Lefteris Papadimas and Renee Maltezou, “Greek PM called,” , December 20, 2014, Tsipras freezes privatizations, markets tumble,” , http://www.ft.com/intl/cms/s/0/e1df99a2-8f46-11e4-b080- January 28, 2015, http://www.reuters.com/article/ 00144feabdc0.html#axzz3l9odpylY. 2015/01/28/us-greece-politics-idUSKBN0L10VP20150128. 15 , “In graphics—Greece's elections,” 17 Stelios Bouras, “Greece Rehires Laid Off Cleaners as January 26, 2015, http://www.economist.com/ Syriza Reverses Austerity,” Wall Street Journal, May 11, greekgraphs/. 2015, http://www.wsj.com/articles/greek-government- agrees-to-rehire-cleaners-1431367128/.

UNDERSTANDING THE EUROPEAN CONSEQUENCES OF A MODERN GREEK ODYSSEY | 7 be privatized.”18 In a direct challenge to unexpected 0.8 percent growth in the second German economic and political dominance, quarter thanks to a depreciated euro, its 2015 Athens attempted to create a “Euro-Med Group” growth forecast was revised downward from as a counterweight to Berlin. This group, 2.9 percent to 0.5 percent this spring. More consisting of Portugal, Spain, , , recent estimates suggest that the Greek Italy, Greece, and Cyprus, was intended to draw economy will contract by -2.3 percent this year greater attention on the needs of southern and by -1.3 percent in 2016 before returning to European countries. positive growth in 2017.23

But despite Syriza’s best intentions, the negative These economic losses were perhaps only effects of its policy shift manifested almost exceeded by the government’s diplomatic and immediately. Prior to the January 25 election, political maladroitness. After the Tsipras Greece’s recession had ended and its GDP had government came into office, many EU increased by 1.7 percent over a 12-month leaders—including —initially period.19 Year-on-year GDP growth turned expressed their willingness to hear the new negative in the last quarter of 2014 and first government’s concerns and to apply some quarter of 2015, declining -0.3 and -0.4 percent, flexibility to future economic programs. But as respectively.20 Foreign direct investment went progress stalled, Tsipras and his outspoken from a positive 1.05 percent at the end of 2014 Finance Minister only grew to -0.16 percent in the first quarter as foreign more intransigent in their demands. Less than investors fled the imminent policy uncertainty. a month into negotiations, relations between Government revenues fell by €5 billion in the Athens and Berlin had deteriorated so far that first quarter of 2015 alone, from €21.8 billion to Varoufakis noted that “we couldn’t even agree €16.8 billion, as political uncertainty loomed to disagree” following a meeting with his large on the horizon.21 By June 2015, capital German counterpart Wolfgang Schauble. As controls had been imposed by the Greek these negotiations dissolved into acrimonious authorities as bank deposits plummeted, recriminations, however, Greece not only limiting cash withdrawals to €60 per day. Food, succeeded in alienating its German fuel, and medical supplies had become scarce counterparts but its potential Euro-Med Group and Greece’s banking system grew extremely allies as well resulting in the formation of a fragile. A main driver of the Greek economy, Eurozone coalition of the other 18 Eurozone tourism, suffered as last-minute bookings fell countries in opposition to an increasingly by almost 30 percent early on in the key isolated Greece. summer months.22 While Greece posted an

18 Costas Paris and Alkman Granitsas, “Greece to Proceed Press release, July 21, 2015, with Piraeus Port Privatization,” Wall Street Journal, http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/ February 10, 2015, http://www.wsj.com/articles/greece-to- A0701/PressReleases/A0701_SEL05_DT_QQ_01_2015_01_F_ proceed-with-piraeus-port-privatization-1423573999/. EN.pdf. 19 Eurostat, “News Release, 29/2015,” February 13, 2015, 22 BBC, “Planning a holiday in Greece? Here’s what you http://ec.europa.eu/eurostat/documents/2995521/6625198/ need to know,” July 7, 2015, http://www.bbc.com/ 2-13022015-AP-EN.pdf/6f7a18eb-0b2a-466b-b444- news/business-33205269/. 4d240889a723/. 23 Official Journal of the , “Council 20 Hellenic Statistical Authority, “Quarterly National Decision (EU) 2015/1410 of 19 August 2015 giving notice Accounts, 2nd Quarter 2015 (Provisional Data),” press to Greece to take measures for the deficit reduction release, August 28, 2015, http://www.statistics.gr/portal/ judged necessary to remedy the situation of excessive page/portal/ESYE/BUCKET/A0704/PressReleases/A0704_SE deficit,” August 19, 2015, http://eur-lex.europa.eu/legal- L84_DT_QQ_02_2015_01_P_EN.pdf. content/EN/TXT/HTML/?uri=CELEX:32015D1410&from=FR 21 Hellenic Statistical Authority, “Quarterly Non-Financial /. Accounts of General Government, 1st Quarter 2015,”

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to win concessions from its creditors or obtain Greek GDP Growth (% yoy) - Phase II alternative funding from Moscow, it did sign a 6 €2 billion agreement to bring Russian natural 4 gas to Greece from the proposed Turkish 2 Stream pipeline—increasing its continued 0 reliance on Russian energy resources in the future.24 Moreover, Syriza’s unsuccessful -2 Russian diplomatic overtures overshadowed its -4 positive work to improve relations with -6 to support promising Cyprus negotiations as part of its broader regional energy diplomacy -8 2012 2013 2014 2015* 2016* efforts. Phase I Phase II *Data for 2015 and 2016 is forecast. Tsipras’s most destabilizing gambit, however, was his decision to call a snap national referendum on July 5 over whether or not to Greek Parliament Seat Distribution - accept the terms of a future bailout proposal. Phase II The response by the Greek people was a Syriza Center-Left resounding “OXI”—61.3 percent supported New Democracy Far-Right rejecting the deal.25 While the move gave the Other prime minister a strong negotiating mandate, the gambit came too late. The deal which the Greek people voted upon was no longer on offer Jan-15 149 30 76 30 15 by Greece’s creditors at the time of the referendum due to Tsipras’s negotiating tactics. As the results of the referendum were Jun-12 71 33 129 38 29 announced, former Prime Minister Samaras— who had done his best to implement the earlier bail-out terms—resigned as leader of the New Democracy Party.26 In order to reduce his isolation and gain additional leverage, Prime Minister Tsipras and Nearly two weeks after Greece became the first his ministers made several high-profile visits to developed country to miss an IMF payment, a Moscow to discuss closer economic and energy meeting was held on July 12 cooperation, which suggested that Tsipras was in a final, last-ditch attempt to agree on bailout willing to subjugate Greece’s euro-Atlantic terms for Greece. After nearly six months of orientation and possibly disrupt EU consensus unsuccessful negotiations, Prime Minister regarding the imposition of Russian sanctions Tsipras was faced with the decision of whether should its creditors fail to acquiesce to his to preserve Greece’s place in the monetary demands. While the Syriza government failed union by accepting a third bailout program or

24 Elena Mazneva and Eleni Chrepa, “Russia Strengthens 6, 2015, http://www.ft.com/intl/cms/s/0/ff37c3a0-22e7- Greece Ties with Gas Link Deal to Europe,” Bloomberg, 11e5-9c4e-a775d2b173ca.html#slide0/. June 19, 2015, http://www.bloomberg.com/news/articles/ 26 A. Makris, “ND Leader Samaras: ‘The Government Has 2015-06-19/russia-clinches-greece-accord-to-build-gas- Fooled Society,’” Greek Reporter, April 23, 2015, pipeline-to-europe/. http://greece.greekreporter.com/2015/04/23/nd-leader- 25 Kerin Hope and Henry Foy, “Greece’s eurozone future samaras-the-government-has-fooled-society/. in doubt after decisive No victory,” Financial Times, July

UNDERSTANDING THE EUROPEAN CONSEQUENCES OF A MODERN GREEK ODYSSEY | 9 risk the country’s ejection from the Eurozone. If concessions to Athens (particularly related to a he refused, Greece would be unable to submit reduced primary budget surplus), Greece’s its missed payment to the IMF by July 30, debt-to-GDP ratio will continue to grow with leading to an official default and near certain some forecasts estimating it could reach 200 expulsion from the Eurozone. Despite imposing percent by next year.28 Tsipras’s policy U-turn capital controls and an increasingly tenuous marks the end of the second phase of Greek economic situation, Tsipras enjoyed an policy over the last 18 months, as Athens astonishingly high degree of public support abandoned its confrontational approach with his approval ratings remaining above 60 toward its creditors, which ultimately left the percent due to the public perception that country in a weakened economic, political, and Tsipras was fighting to restore a sense of diplomatic condition. The Tsipras government’s national pride after five painful and position had become so weakened that new humiliating years of creditor-imposed Greek elections were called seven months after austerity. its election.

As Greek-European relations plummeted Phase III: Tsipras’s Policy U-turn and following the snap referendum and after Greece’s Uncertain Future (July 2015– complete political fatigue accumulated over Present) five years of “muddling through” to preserve the integrity of the currency union, German While Tsipras’s policy U-turn ensured that Finance Minister Wolfgang Schauble Greece would not descend into economic ruin, recommended a five-year “time out” for Greece, it set the stage for a period of intense political making the prospect of a “Grexit” a very real turbulence as Athens simultaneously prepared 27 possibility. After Berlin signaled that it was to implement its third €86 bailout plan and for not prepared to save Greece at any cost, at new elections. The new 29-page memorandum around 6:00 AM on July 13, 2015, Prime Minister returns to measures that have failed in the past, Tsipras made the strategic calculation that the specifically related privatization, and places Greek people were unwilling to accept possible them in receivership. Greece’s €50 billion expulsion from the Eurozone and therefore privatization fund will be supervised by accepted an onerous €86 billion bailout Greece’s creditors despite being located in program. Tsipras fully rejected the national Athens—a symbolic defeat representative of referendum and the democratic mandate he Greece’s sovereignty.29 The program will aim to was given by the Greek people only six days privatize Greek ports (with particular emphasis earlier. The agreement represented the total on the Port of Piraeus), regional airports, and capitulation of the Greek government to even power grid where an eighth of the proceeds will greater austerity and creditor supervision than be returned to Greece and the remaining funds envisioned in the previous bailout packages. will go to Greece’s creditors. It is unclear While the bailout package is considerably larger than anticipated and offered some

27 Melissa Eddy, “Germany’s Tone Grows Sharper in https://www.imf.org/external/pubs/ft/scr/2015/cr15186.pd Greek Debt Crisis,” New York Times, July 16, 2015, f/. http://www.nytimes.com/2015/07/17/world/europe/eurozo 29 Gabriele Steinhauser, Viktoria Dendrinou, and ne-greece-debt-germany.html?_r=0/. Matthew Dalton, “Eurozone Leaders Reach Rescue Deal 28 International Monetary Fund, Greece: An Update of IMF for Greece, With Tough Conditions,” Wall Street Journal, Staff’s Preliminary Public Debt Sustainability Analysis, July 13, 2015, http://www.wsj.com/articles/eurozone- Report No. 15/186, July 14, 2015, leaders-reach-unanimous-agreement-on-greece-says-eus- tusk-1436771076/.

10 | HEATHER A. CONLEY AND JAMES MINA whether Greece will be able to overcome the populist and anti-austerity mantle by previous obstacles to achieving privatization. committing to cancel Greece’s third bailout. Additional high-profile party defections— Greece did win an important victory over its including by the former Speaker of the primary budget surplus. Its creditors have Parliament Zoi Konstantinopoulou—further allowed Greece to assume a budget deficit of - eroded Syriza’s support. Tsipras also faced 0.25 percent in 2015 and produce a more objections from the “Group of 53,” a sub-faction gradual increase in its primary surplus, which within Syriza led by Greek Finance Minister it is assumed will be 0.5 percent in 2016, 1.75% Tsakalotos that occupies the political space in 2017 and 3.5% in 2018. Greece should see between Syriza’s more pragmatic base and its savings of nearly €20 billion from this more radical fringe. Several of the group’s budgetary gradation alone to be used to members considered withdrawing their stimulate the economy.30 While a positive candidacy in protest of Tsipras and his development, Greece was required to pass policies.33 Syriza was also rocked by its first legislation which will end early retirement and high-level corruption scandal just days before slowly increase the retirement age to 67, the election, after Alekos Flambouraris—a man liberalize its energy and pharmaceutical sectors close to Tsipras who previously served as and increase taxes for shipping firms and minister for coordination—was accused of a Aegean Islands -- all measures that the Tsipras conflict of interest between his government government has previously rejected.31 position and his ongoing relations with Greek financial interests. As Syriza’s platform has After significant delay on August 14, the Greek relied heavily on its clean track record and its parliament approved 35 required “prior complete break from the old and corrupt Greek actions” in support of the bailout package political elite, the scandal raised questions without the support of a number of Syriza about the party’s anti-establishment 32 MPs. Prime Minister Tsipras was only able to credentials. Tsipras’s popularity fell from a high pass these measures due to the support of of 75 percent in April to just over 25 percent in opposition parties. These very unpopular votes August. continued to fray the Syriza party, causing Prime Minister Tsipras to dissolve the Greek Throughout the short campaign, Tsipras parliament on August 20 with the hopes that a promised to continue to fight for more lenient fresh election would consolidate his support bailout terms in the future, which he will have and restore his parliamentary majority. difficulty negotiating, but in reality the debate focused on the past rather than the future. A day after the dissolution of the government, Tsipras accused New Democracy party leader former Energy Minister Evangelos Meimarakis of representing “the announced his formal split from Syriza along backwardness and corruption, vested interests with 29 other MPs, and the formation of a new and scandals” of the old political establishment, party, , which picked up Syriza’s to which Meimarakis replied by calling Tsipras

30 Official Journal of the European Union, “Council 2015/08/14/us-eurozone-greece-tsipras- Decision (EU) 2015/1410 of 19 August 2015.” idUSKCN0QJ0FI20150814/. 31 BBC, “Third Greece bailout: What are eurozone 33 Nektaria Stamouli and Viktoria Dendrinou, “Familiar conditions?,” August 21, 2015, http://www.bbc.com/news/ Faces Dominate New Greek Cabinet,” Wall Street Journal, world-europe-33905686/. September 22, 2015, http://www.wsj.com/articles/ 32 Lefteris Papadimas and Deepa Babington, “Greek PM familiar-faces-likely-to-dominate-new-greek-cabinet- faces biggest party revolt yet as bailout approved,” 1442936195. Reuters, August 14, 2015, http://www.reuters.com/article/

UNDERSTANDING THE EUROPEAN CONSEQUENCES OF A MODERN GREEK ODYSSEY | 11

“the prime minster of the 60 euros,” recalling the political backlash of his broken bailout his decision to impose capital controls. While promises. But his victory signals an important Syriza maintained a comfortable lead of about political shift within Greece: Greece’s political 15 percent, the polls had suggested that New establishment and its center have collapsed as Democracy was gaining traction by promising both New Democracy and PASOK as well as new to cooperate with Syriza to restore some moderate parties failed. Now that the Greek semblance of stability to Greek governance. has become more polarized, Tsipras, by contrast, announced during the it will be increasingly difficult for Prime campaign that he would refuse to work with the Minister Tsipras to modulate policies and old Greek establishment, ruling out a formal implement the terms of Greece’s bailout alliance with New Democracy, PASOK, and the package. As time passes and Greece’s economic centrist To Potami (). On the eve of woes deepen (the Greek economy is now elections polls suggested a close race with expected to contract by 2.3 percent in 2015 and Syriza’s political future hanging in the balance. 1.3 percent in 2016), Tsipras will likely be confronted with future political defections as On September 20, Syriza emerged as the clear his parliamentary majority has fallen from 162 winner, taking 35.47 percent of the vote and to 155.35 Rebellion by a handful of lawmakers claiming 145 seats. While the results did not from the prime minister’s coalition would be give Syriza a mandate to govern independently, sufficient to destabilize the government, setting it was sufficient to allow it to rule in coalition the stage for future political instability. once again with the far-right Independent Greeks (ANEL), which claimed 10 seats. New This is precisely what worries Greece’s Democracy won 28.09 percent of the votes (75 creditors. Eurozone negotiators mandated that seats) and remained the largest opposition the disbursement of Greece’s funding from its party. The xenophobic, neo-Nazi third bailout would be entirely conditional party placed third with 6.99 percent (18 seats) upon its full compliance with its bailout terms. as anti-immigrant and nationalist sentiments Already, these fears are proving self-fulfilling as were heightened in response to Greece’s (and the government struggles to implement the Europe’s) urgent migration crisis. PASOK won reforms it promised to its creditors. On October 6.28 percent (17 seats) of the vote, while To 16, parliamentarians narrowly passed a fresh Potami (the River) earned above 4 percent.34 set of reforms with just 154 votes, which The Syriza splinter group Popular Unity failed included tax and pension reforms, and the to breach the 3 percent threshold and did not reintroduction of an unpopular property tax. enter parliament. Despite New Democracy’s support of fiscal Prime Minister Tsipras not only vanquished his reform, Meimarakis was quoted as saying he far-left rivals (both Lafazanis and refused to vote for “recessionary measures,” Konstantinopoulou lost their seats), also he suggesting that Tsipras may not be able to turn consolidated his control over Syriza. The to the opposition to pass tough legislation in the popularity he earned for his tough stance future as he has in the past.36 Members from his toward Greece’s creditors insulated him from

34 Alexandros Avramidis, “New poll gives leftist Syriza Reuters, October 5, 2015, http://www.reuters.com/article/ thin lead in Greek snap election,” Reuters, September 8, 2015/10/05/eurozone-greece-budget- 2015, http://www.reuters.com/article/2015/09/08/us- idUSL8N1252YF20151005. greece-election-poll-idUSKCN0R82P020150908/. 36 Kerin Hope, “Syriza presents controversial package of 35 Renee Maltezou and Lefteris Papadimas, “Greece’s tax and pension reforms,” Financial Times, Tsipras pleads for debt relief with austere budget,”

12 | HEATHER A. CONLEY AND JAMES MINA

for banks up to €25 billion.38) The release of the Greek GDP Growth (% yoy) - Phase III program’s remaining €62 billion is also entirely 6 conditional on Greece’s ability to implement 4 staged reforms between now and 2018. This 2 uncertainty also poses important questions about the future of the International Monetary 0 Fund’s involvement in the Greek bailout, as well -2 as the potential for future Greek debt relief, -4 although some reports have suggested that the -6 European Union may cap Greece’s debt servicing costs at 15 percent of GDP annually. -8 2012 2013 2014 2015* 2016* Should Greece fail to secure the remaining Phase I Phase II Phase III* funds and future debt forgiveness, the country *Data for 2015 and 2016 is forecast. will inevitably fall back into a full-scale financial crisis. This time, however, Athens may not be able to count on its European partners to Greek Parliament Seat Distribution - support future bailouts. The taboo against Phase III formally proposing a temporary “Grexit” has Syriza Center-Left been broken. Whether simply viewed as a New Democracy Far-Right negotiating tactic or not, the damage was done. Other After five-plus years of supporting Athens without sustainable reform progress, European Sep-15 145 28 75 28 24 leaders (and publics) may opt to let Greece find its own way.

Jan-15 149 30 76 30 15 The second Syriza-led government will not only be challenged by its ability to implement its Jun-12 71 33 129 38 29 bailout program, however; it will immediately be forced to address the growing humanitarian

crisis caused by the dramatic influx of coalition partner, the Independent Greeks, also immigrants fleeing conflict in the Middle East. expressed reservations about the package. The Called the “worst refugee crisis since the Second government will need to pass additional World War,” there has been a 750 percent measures by early November in order to unlock increase in migrants arriving in Greece over the a €15 billion tranche of funding to recapitalize past calendar year, with 124,000 migrants its floundering banks.37 (Greece already arriving by sea from January to July alone, 39 received €10 billion in August for this purpose, according to the UNHCR. The European Union bringing the total amount of funding available has been slow to provide financial assistance to http://www.ft.com/intl/cms/s/0/c64ab76c-7181-11e5-ad6d- 38 George Georgiopoulos and Lefteris Papadimas, f4ed76f0900a.html#axzz3oYgO1Tjx. “European bailout fund to disburse first Greek tranche on 37 Karolina Tagaris and George Georgiopoulos, “ECB’s Thursday,” Reuters. August 19, 2015, Draghi urges Greece to stick to bailout for bank recap, http://www.reuters.com/article/2015/08/19/us-eurozone- debt relief,” Reuters, October 10, 2015, greece-esm-idUSKCN0QO1SH20150819. http://www.reuters.com/article/2015/10/10/eurozone- 39 UNHCR, “Number of refugees and migrants arriving in greece-draghi-idUSL8N12A0LM20151010. Greece soars 750 per cent over 2014,” August 7, 2015, http://www.unhcr.org/55c4d1fc2.html.

UNDERSTANDING THE EUROPEAN CONSEQUENCES OF A MODERN GREEK ODYSSEY | 13

Greece to alleviate the crisis, although Brussels this stabilization. However, Greece’s ability to has provided Athens with €5 million from the realize a greater regional role has significantly Asylum, Migration, and Integration (AMIF) and diminished due to its economic and domestic Internal Security (ISF) funds, an additional €33 challenges. Greco-Russian relations also remain million from multi-annual funding for strong under the current Syriza government as migration and borders, and may provide evidenced by Greece’s reluctance to deny further assistance to support long-term Russian aircraft overflight rights en route to processing centers or “hotspots.”40 EU countries Syria at the request of Washington.41 have been reluctant to accept greater numbers of asylum seekers from Greece and other Conclusion countries as high unemployment, limited national budgetary resources, and widespread Five years, five elections, and five governments xenophobia continue to dominate national later, we find Greece in a more precarious political debates, although a mandatory scheme political and economic position than ever relocating 160,000 migrants was recently before. Ironically, 18 months ago Greece pushed through the European Council. Four appeared poised for an economic recovery after countries—the , , three years of some semblance of political , and —opposed the motion, stability. The economy grew marginally for the however, leading to speculation about whether first time in years, the government achieved a or not the plan will actually be implemented in primary budget surplus, and public sector full. This challenge will only further exacerbate expenditure was reigned in. But since then, Greece’s challenges as Greece is likely to dynamic political instability has reversed this relinquish greater sovereignty over its border trend. Even though the country has received to Brussels in addition to its monetary and €326 billion in funds through three budget policies. international bailout programs to tackle its debt, its debt-to-GDP ratio will reach 200 Athens will also need to navigate an percent next year. More than a quarter of the increasingly turbulent geostrategic Greek population (25.2 percent) remains environment. As a NATO member and front- unemployed, the government has imposed line state, Greek officials envisioned Greece restrictive capital controls, and the country has playing an important stabilizing role in an dipped back into a recession with growth emerging geostrategic triangle that extends expected to remain negative until 2017. The from Ukraine in the East to Libya and the already fractious Greek political landscape has Middle East in the south. Athens has also splintered even further, as Greece’s centrist explored the creation of a “line of stabilization” parties (both left and right leaning) have in the Eastern Mediterranean through its close diminished. Although the September election cooperation with Egypt, Cyprus, and Israel to purged Syriza of its hard-left elements, the new counter the widespread instability emanating Tsipras government enjoys a slimmer from Syria and Iraq. Growing energy ties parliamentary majority that will challenge its among these four countries can contribute to ability to pass critical reform legislation and

40 European Commission, “Managing the refugee crisis: package/docs/communication_on_managing_the_refugee_ immediate operational, budgetary, and legal measures crisis_en.pdf. under the European Agenda on Migration,” COM (2015) 41 Renee Maltezou and Lidia Kelly, “Greece considers U.S. 490 Final, September 23, 2015, http://ec.europa.eu/ request to close airspace to Russian aid flights,” Reuters, dgs/home-affairs/what-we-do/policies/european-agenda- September 7, 2015, http://www.reuters.com/ migration/proposal-implementation- article/2015/09/07/us-mideast-crisis-greece-russia- idUSKCN0R714O20150907.

14 | HEATHER A. CONLEY AND JAMES MINA maintain party cohesion. Greece’s relations Juncker remarked that “Our European Union is with its international creditors has reached an not in a good state. There is not enough Europe all-time low as a result of the Tsipras in this Union. And there is not enough Union in government’s vitriolic and unproductive stance this Union.” As the prepares to in negotiations. As Europe is now politically and renegotiate the terms of its EU membership and economically consumed by an enveloping the migration crisis grows, there is currently migration crisis, there may be less policy little appetite for “more Europe.” Nonetheless, attention, funding, and sympathy applied to Europe like Greece will be forced to formulate Greece’s ongoing economic challenges, which its own unique answer to the effect of could lead to an accidental cascade of events— in its efforts to overcome its and an unintended Eurozone exit. decades-long economic and political stagnation.

Greece’s odyssey reminds us of the political About the Authors nature of this economic crisis. Decades of political behavior shaped Greece’s economic Heather A. Conley is senior vice president for policies and structural impediments. Current Europe, Eurasia, and the Arctic, and director of and future Greek leaders must tackle the deep the Europe Program, at the Center for Strategic structural deficiencies in the Greek economy to and International Studies (CSIS) in Washington, restore competitiveness, create jobs, and D.C. James Mina is a research associate with the improve the country’s fiscal health. In other CSIS Europe Program. words, Greece must democratically adjust to the demands of twenty-first-century globalization. Acknowledgments Over the past 18 months, the world’s first democracy has demonstrated that democracies This report is made possible by the generous are understandably reluctant to take painful support of the Stavros Niarchos Foundation. economic decisions in order to adapt to this competitive economic setting. As demonstrated in the two elections held over the past nine This report is produced by the Center for months, the Greek people clearly believe that Strategic and International Studies (CSIS), a Tsipras can best lead Greece out of its economic private, tax-exempt institution focusing on crisis while remaining part of the European international public policy issues. Its Monetary Union. research is nonpartisan and nonproprietary. Greece is not alone as it faces difficulties CSIS does not take specific policy positions. adjusting to globalized markets and economies; Accordingly, all views, positions, and other European nations have struggled with conclusions expressed in this publication this concept as well and have proposed should be understood to be solely those of different solutions from hyper-export and the author(s). mercantilist strategies (such as Germany and © 2015 by the Center for Strategic and the UK) to greater protectionist practices (such International Studies. All rights reserved. as France). One additional answer has been increased calls for greater European integration and unity but even the prospect of this answer has been dimmed. In his recent “State of the European Union” address, European Commission President Jean-Claude